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Current grant system won’t work in a falling market
The government needs to think again about grant to prevent housing association development from collapsing in a falling market, writes Matthew Bailes.
Just about anyone who has looked seriously at housing supply has concluded that absorption rates (the rate at which new homes can be released into a local market without affecting prices) seriously limit the rate at which new homes are built for sale. It is a pretty obvious conclusion – why would a developer adopt a business model that reduces its margins and increases its risk?
It is also pretty obvious that absorption rates do not limit in the same way the building of homes for social or affordable rent, since this does not tap into the same market.
Happily, the government seems to have reached the equally obvious corollary – providers need to build subsidised rented housing at scale to meet its supply aspirations.
“As far as building affordable rented housing goes, you really wouldn’t start from here.”
It is also self-evident that building homes for sale when house prices are falling is commercial self-harm, particularly if the price you’ve paid for land and build costs reflects more optimistic assumptions.
Therefore, in such a market, developers are likely to slow down or stop. At this point, subsidised rented housing becomes even more important as the principal way to stop activity and capacity haemorrhaging in the housebuilding sector.
Rumour has it that the government understands this last argument, too. This is just as well, because there are clear warning signs that the market could go into reverse.
Unfortunately, as far as building affordable rented housing goes, you really wouldn’t start from here.
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There are two fundamental problems. First, a substantial proportion of affordable rented homes are built by developers because of Section 106 obligations. This means that if the overall development becomes unviable, work on these affordable homes will also stop, which is pretty much what happened in 2008.
Regardless of economic conditions, the dominance of Section 106 development is also undesirable in the medium-term, as it means housing associations are using their financial clout to compete with one another to buy homes that would be built anyway.
It would be much better if associations paid a lower price for these homes or even left this market to new for-profits, so they could focus on land-led development, which is more likely to be net additional and less likely to be blown away by a market downturn.
The second big problem in some way follows from the first. Many associations have focused on Section 106 development partly because it is very difficult to make land-led development stack up. This, in turn, is the result of the grant offered by the government.
Subsidised housing needs subsidy and the grant rates currently offered fall very short of meeting the full subsidy gap, especially for rental homes and in high-value (also high-need) areas.
Absent the necessary subsidy from government, associations have, to their credit, sought subsidy by building mixed-tenure developments, using profits from outright sale and shared ownership to subsidise rent.
This model has worked quite well in a rising market, because homes for sale have generated the necessary profits.
“The government needs a robust plan to steady housing outputs in the event of a price correction.”
However, it clearly won’t work if prices are falling and profits evaporate.
At that point, associations’ existing schemes will lose money and they will rightly be nervous about investing in similar schemes that rely on sales profits, even if land and build prices start to adjust.
Effectively, therefore, the government has perhaps unwittingly baked in a model in which large social housing providers reduce their outputs at a time when they are most needed.
The government should look at three things to address these problems. First, if it hasn’t got one already, it needs a robust plan to steady housing outputs in the event of a price correction. This will almost certainly involve converting homes for sale to rent and increasing grant rates, as it did last time.
Second, it would make sense to immediately increase grant rates for rented homes, to mitigate the risk of associations reducing investment in what is now a nervy market.
Third, it needs a long-term plan, to encourage associations to take on land-led development and increase the proportion for rent. This will of necessity involve more grant and higher grant rates. It should also consider how risk and reward could be shared, so that subsidy levels automatically adjust to market conditions. The strategic partnerships launched by Homes England might be useful vehicles to explore options.
Absent these changes, the government’s aspirations for housing supply could be holed below the waterline. It is time for more concrete action to back up the fine words.
Matthew Bailes, chief executive, Paradigm Housing
